AGILE LEGAL BLOG

Hidden Secrets of a Security Token Offering (STO)

 *Please note this article is based on Australian regulations.

Security Token Offerings (STO)s have become the next "hype" project in the blockchain space.

There are many people who are excited by the mechanisms of a security token such as receiving a dividend and/or rights that may give individuals control over certain aspects of the platform.

However, many individuals are unaware of the setbacks of launching a Security Token.

EXTENSIVE TRADE RESTRICTIONS

The most important setback of launching an STO is that your token will need to adhere to extensive trade restrictions. Trading a Security Token as seamlessly as a digital currency (such as bitcoin) is impractical and unsustainable as compliance mechanisms running in the background will impose trade restrictions on your Security Token.

ONGOING COMPLIANCE

The second setback is that launching a STO will require ongoing compliance and you will require highly experienced employees on your team to maintain the ongoing compliance of your platform. These employees often command a minimum 6-figure salary package.

HIGH BARRIER TO ENTRY TO LIST ON AN EXCHANGE

The third setback is the high barrier to entry to list your Security Token on an exchange. Due to requirements to satisfy and maintain compliance requirements, every exchange you list your Security Token on must adhere to your token’s particular compliance requirements. This will either eliminates exchanges in which you can list on, or you will be subject to an expensive listing fee.

Currently, listing fees for Digital Currencies are quite high and it is predicted that listing fees will be at least double the price of listing on the most lucrative Digital Currency Exchange presently on the market.

DIGITAL EXCHANGE LICENSING AND COMPLIANCE

This brings us to the fourth and final setback. Digital Exchanges are required to obtain relevant licensing to trade securities on their platform. This adds another barrier to entry as it will significantly reduce the exchanges available to trade a Security Token on.

CONCLUSION

When contemplating whether to launch an STO, it is advisable that you determine whether what you want to achieve can only be done by launching an STO or it can be done with a normal security.

It is important that you consider whether the efficiencies of launching a security on the blockchain outweigh the cost of setting up and maintaining a security.

For example, if you want to offer a dividend to the purchasers of your STO, consider the following questions:

  1. Is it possible to do this simply through the distribution of shares?
  2. What are the benefits of using blockchain?
  3. Are the benefits achievable or practicable?

Many people believe a benefit of an STO is that the Security Token will be tradeable on a Digital Exchange and therefore, easily accessible to an international market. Another commonly perceived benefit is that you individuals will be able to store their security token in a personal wallet. However, many have not considered what must happen every time a security is traded to another person, or how easy it is to transfer the security to an international jurisdiction or whether it is practical to allow a person to store their security in a personal wallet, where the token cannot be retrieved altered or amended until transferred or released.

The purpose of this article is not aimed to deter companies away from launching a STO but it is to illuminate why an STO may not be suited to many projects. We are great believers of Blockchain Technology and we do believe STOs have their purpose in the Blockchain space.

For example, we are quite fond of projects that fractionalise assets and believe fractionalisation is a great use case of an STO. However, it is equally important that we advise our clients and companies to consider the above before launching a STO.

If you would like to further discuss STOs and their regulatory Framework in Australia, please contact Harly Zappino at h.zappino@agilelegal.com.au or Kenny Lee at klee@agilelegal.com.au.